Re: [Quantlib-users] CMS Spread Cap Pricing

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Hi Peter,

When I use a constant volatility, the error is within say 10%, and can be attributed to the pricing engine (maybe there are other errors, but it is not the current focus). With the linear volatility cube, the atmStrike(startDate, ql.Period('1y')) is returning 0.03253 but BBG has an atmStrike of -0.0759.  I tried to implement a Sabr cube and got the following error:

guess = nRows * [0]
for n in range(nRows):
    guess[n] = (ql.QuoteHandle(ql.SimpleQuote(0.1)),
                ql.QuoteHandle(ql.SimpleQuote(0.1)),
                ql.QuoteHandle(ql.SimpleQuote(0.1)),
                ql.QuoteHandle(ql.SimpleQuote(0.1)))

isParameterFixed = [False,False,False,False]
volCubeSabr = ql.SwaptionVolCube1(swaptionVolMatrixHandle,optionTenors,
                              swapTenors, strikeSpreads, volSpreads,
                              swapIndex1, swapIndex2, vegaWeightedSmileFit,
                                  guess, isParameterFixed, True)

RuntimeError: global swaptions calibration failed: error tolerance exceeded:

using rmsError tolerance 0.01,

option maturity = October 25th, 2022,

swap tenor = 1Y,

rms error = 19.629123 %,

max error = 32.809999 %,

   alpha = 1.70317n   beta = 0.130399

   nu = 82.568

   rho = 0.222489

I tried to look at LognormalCmsSpreadPricer.cpp and all the related source code files, but cannot figure out how atmStrike is calculated and how to debug this. It seems that there might be a more grave underlying error in my code if the atmStrike is nowhere near the expected value. Do let me know what you think of this, and if you need me to provide any more information. Again, thank you so much for your input.

Regards,
Aditya Gupta.
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